Crude may extend sharp falls; OPEC unlikely to prop up prices

Focus article by Muhamad Fadhil

DUBAI (ICIS)–Crude futures may continue their sharp declines on oversupply concerns, with energy cartel OPEC more preoccupied with the possibility of losing market share if it cut production than in stemming the apparent free fall in oil prices, industry sources said on Thursday.

“Oil prices are heading south but OPEC is not likely to intervene,” a Middle East-based polymer distributor said.

OPEC, which accounts for a third of the world’s crude production, decided in a meeting in Vienna on 27 November to keep production stable at 30m bbl/day for the next six months despite growing pressure on crude prices on the supply side.

The cartel’s member countries in the Middle East, led by Saudi Arabia, are keen on protecting market share in the wake of rapidly rising supply coming from the US amid the country’s shale gas and oil boom.

Middle East countries are cutting their official selling prices (OSP) for crude to lure buyers in a bearish market.

“The Middle Eastern players are cutting their OSP but few buyers are available,” a Dubai-based energy trader said.

Earlier this week, Iraq cut the January price of its flagship Basrah Light oil in Asia and the US, days after Saudi Arabia, the world’s largest exporter of crude, lowered its own offers for all its crude grades in the same markets.

The Saudi and Iraqi price cuts are expected to place further downward pressure on Arab Gulf grades in the coming weeks.

Given their sizeable foreign exchange reserves, Saudi Arabia, Qatar and Kuwait can afford to let oil prices fall to as low as $40/bbl, market sources said, but falling crude values are proving to be detrimental to their petrochemical industries.

Faced with prospects of plunging sales, petrochemical suppliers in the region are calling for their governments to help abate the fall in oil prices, industry sources said.

US crude prices have fallen by more than 40% since their peak of more than $110/bbl in June, while Brent crude has fallen from $115/bbl that same month to below $65/bbl – its lowest in five years.

At midday, US crude was trading at $61.51/bbl, while Brent crude stood at $64.84/bbl.

Buying sentiment in the global petrochemical markets is at its weakest since the 2008 global financial crisis, market sources said.

Petrochemical prices came under severe pressure amid concerns of slowing economic growth in early October, when the International Monetary Fund (IMF) trimmed its world GDP growth forecasts to 3.3% in 2014 and to 3.8% in 2015.

With major economies continuing to exhibit weakness, plunging oil prices may have yet to hit bottom, industry sources said.

In Asia, manufacturing activities in China is still slowing down, with its November purchasing managers’ index (PMI) at an eight-month low of 50.3, while Japan – the world’s third biggest economy – has slipped into a recession. The US and the eurozone are likewise stricken with economic difficulties.

Middle Eastern producers can play the price game in the crude market since their breakeven production cost is much lower than that of the US, industry sources said.

US shale refiners need crude prices to be at least $70/bbl to break even, they said, adding that the unabated oil price downtrend is threatening expansion of various mega-projects in the country.

“US companies investing in shale are under pressure to reconsider their expensive projects,” said a source close to an Iranian supplier.

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections